Secret French Plan In the European War Of The Automakers

“Volkswagen has chosen to wipe out PSA,” a source in President François Hollande’s entourage told Le Monde. PSA Peugeot Citroën, Europe’s second largest automaker, is teetering. Volkswagen Group, Europe’s largest automaker, appears invincible. Its brands range from entry-level Škoda to exotic Bugatti, with SEAT, Volkswagen, Audi, Porsche, Bentley, and Lamborghini in between. It wants to reduce overcapacity in Europe “on the backs of the French,” the source said. But now a secret plan has seeped from the woodwork at the Ministry of Finance—a desperate, misbegotten, taxpayer-funded deal.

The new car market in France is morose. Sales in 2012 dropped 13.9% from the miserable levels of 2011. PSA sank even deeper into that quagmire, with sales dropping 17.5%. All hopes had been riding on its new Peugeot 208 that hit the streets in the fall. But hope has turned into disappointment. An initial restructuring plan was nixed by the government. Nevertheless, PSA will shutter its plant at Aulnay (Seine-Saint Denis) and lay off 8,000 people ... by 2014 [As Cars Burn In France, The Industry Of Hope Booms].

The company has been bleeding cash. Its finance subsidiary, Banque PSA Finance, was bailed out by taxpayers last fall to the tune of €7 billion—a bailout that came under heavy fire from Renault, Ford, and the German state of Lower Saxony, which owns 20% of Volkswagen.

Saving PSA without major restructuring, and layoffs, has become a government priority. Economy Minister Pierre Moscovici, who is rumored to be close to the Peugeot family—which owns 30% of PSA—dropped some hints about the secret plan Sunday evening. He was discussing PSA, “a strong company” that happened to be in a “severe crisis.” More government help? “It’s without doubt necessary to go further,” he said. “It would be up to the executives to initiate the rapprochement that they find useful, and we are here both to accompany them and to weigh in that direction.”

Then the leaks emerged. “If car sales collapse in Europe as they did in 2012, PSA won’t make it through the first half,” a source at the Ministry of Finance toldLe Monde.

Bailouts are designed to protect stockholders, bondholders, and other stakeholders, especially the elite—such as the Peugeot family—at the expense of taxpayers. A real restructuring through a bankruptcy, after the model of GM, would wipe out the Peugeots’ investment and would slam the banks that own much of the debt. Not a good option.

Hence the secret plan. The government is deeply worried about Volkswagen’s strategy of lowering its prices in Europe. The source explained the thinking: Volkswagen can afford it as it sits on €25 billion in cash, but PSA cannot afford it.

A form of governmental dementia. Volkswagen, despite lowering its prices, is immensely profitable. It’s not a perceived pile of cash that gives it the power to lower prices, but its operating efficiencies, cost structure, and booming sales in China and the US. But even Volkswagen’s sales dropped 5.1% in France last year. The marauders in Peugeot’s and Citroën’s backyard were Kia and Hyundai whose sales, albeit a fraction of those of the giants, jumped 18.1% and 42.2% respectively!

Nevertheless, to throw a monkey wrench into Volkswagen’s presumed strategy of wiping out PSA, the government has come up with an ingenious plan: push PSA to acquire GM’s European subsidiary that has been bleeding to death for years, and whose sales in France have crashed last year by 23.8%—Opel.

Simple: take two dying cats and make a healthy one out of them. And do so without major surgery. Or, as Le Monde’s source would have it, build a European champion able to resist the German attacks.

The idea had bubbled up in September as PSA and GM were nitpicking through the details of their new alliance. GM ought to trade Opel for more shares in PSA. But GM rejected it; it was already stuck with 7% of PSA and didn’t want to get dragged deeper into the quagmire. GM had also been scared off by hot-headed declarations of various government officials in response to PSA’s now nixed restructuring plan. Explains the source at the Finance Ministry: “The only way to convince the Americans would be for PSA to buy Opel directly.”

There are some roadblocks. PSA doesn’t have the means. It would require an infusion of government capital, which has been discussed over the last few months, particularly during the Banque PSA Finance bailout. But the Peugeot family stonewalled a dilution of its holdings. And there was resistance among some elected officials and within the Finance Ministry. “It would nationalize the losses of a private company that is responsible for its own difficulties,” groused an enraged bureaucrat.

Indeed. And it would create the worst possible automaker, one that would not be able to exist without taxpayer subsidies. Both are lousy players in the same tough markets with uncompetitive products in the very segment that is in most trouble, the mid-range. But it might be a relief for GM, which for years has been desperately trying to shed Opel. If it could just get unstuck from PSA as well.

And more on governmental dementia, by Bianca Fernet, stilettos-on-the-ground economist in Argentina. The dust has settled—for the time being—from the drama of the US Court rulings regarding Argentina’s payment on defaulted bonds. But it remains a confounding snaggle. And an appeal is coming. It will certainly be a titillating February. Read.... Argentina’s Bonds, Defaults, and Vultures.